The Unsung Beauty of Bureaucracy

Companies need to achieve the right mix of rules and freedom

By

Raymond Fisman and

Tim Sullivan

March 15, 2013 6:27 p.m. ET

For companies that make products for infants, the U.S. legal system can be a hostile place. When a jury or the public at large is presented with Family Tragedy v. Corporate America, the corporation just can't win. So you can imagine that product design for Newell Rubbermaid'sNWL1.12% Graco brand, which makes car seats, strollers and other kids' products, involves strict oversight.

According to the brand's head of car-seat development, John Bachner, any new product goes through five design iterations and hundreds of tests to minimize the risk of a flawed design. This can put a chill on innovation, and it extends the development time by up to two years, but Graco's design team isn't taking any chances.

Most of us don't work in an environment where the failure of our well-meaning innovations can result in dead children and billion-dollar class-action suits. But we all confront bureaucratic constraints that, it often seems, are designed mostly to sap our initiative and prevent us from actually getting stuff done.

The unfortunate reality is that this is exactly the way it should be. The existence of rules and regulations, and the bureaucrats who enforce them, means that less good stuff gets done—but it also puts a check on the kinds of initiatives that can lead to catastrophe.

Though it's easy to accept this premise in theory, most people would say that the bureaucracy in their organization feels like a crushing burden. They would point to the rules that slowed down one or another good idea. What's far tricker is uncovering the bad ideas that were quashed as a result of those same rules.

How can we know which checks and balances are utterly necessary and which are dispensable? One way to find out is to remove them. This, in effect, is what many companies end up doing, though it is often framed as increasing efficiency and cutting costs.

The poster child for this approach is BP. In the late 1990s, BP was held up as a paragon of management gone good, having evolved from a rule-bound, quasigovernmental entity to a slimmer, more efficient company that empowered managers to earn profits for shareholders. BP's staid culture of blindly following rules became one of pushing boundaries.

The awful end of the tale is well known: the March 23, 2005, explosion at BP's Texas City refinery, killing 15 and injuring more than 170 others; the Prudhoe Bay leak in 2006, caused by corroded pipes that needed replacing; and the Deepwater Horizon Well explosion in 2010, which leaked nearly five million gallons of oil into the Gulf of Mexico.

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BP's mistakes are obvious in retrospect, but when then-CEO John Brown was being celebrated for the turnaround, it was far from obvious which checks and balances he should have kept in place at the expense of growth.

One company that has done a better job of balancing oversight and innovation is McDonald's. For reasons of quality control and price, the company strictly limits the latitude of local franchisees. But it innovates nonetheless.

In a kitchen lab at its headquarters in Illinois, McDonald's develops its latest dishes, with an eye to taste, time, cost of preparation, and scope for scaling over its fast empire. It has also done a remarkable job of maintaining a branded experience even as it localizes its products for different markets, like vegetarian fare for India.

McDonald's used to take ideas from franchisees—menu mainstays like the Filet-O-Fish and the Big Mac were both franchise owners' inventions—but it has been years since a major product has come from the franchisee suggestion box. It's easy to see why. As McDonald's has grown to 30,000 stores world-wide, it has become a much greater challenge to ensure that local initiatives fit with the overarching goals of the company.

To appreciate the costs of inadequate coordination, consider the case of Airbus, where, for historical reasons, different parts of the organization long did things their own way. Formed in 1970, Airbus combined 16 different European companies into a single European aircraft manufacturer.

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Even decades later, the lack of centralization allowed, for example, Airbus engineers in Toulouse and Hamburg to use different industrial-design software. In 1996, the incompatibility was blamed for miscommunications in the design and ordering of miles of electrical cables for the A380 superjumbo. Production was set back a disastrous three years. Airbus has since taken the gospel of centralization to heart, consolidating decision-making and design for its newest aircraft, the A350.

An appreciation for consistency, quality control and coordination should give us a bit more respect for the world's bureaucrats and an understanding of why there are varying levels of oversight at different organizations. The absence of bureaucracy at startup companies is not necessarily a sign that they are better-managed than established firms; it just means that they have less to lose if they screw up.

By the same token, many government functions may be laden with bureaucracy, but the private sector might not do any better with the same tasks. Like the makers of baby products, governments deal with uniquely sensitive problems, from ensuring that terrorists never get past airport security to keeping deadly germs out of the food supply.

This isn't meant to eulogize bureaucracy or to imply that every company has achieved the right mix of rules and freedom. But it's a balancing act. We need enough freedom to let employees dream up next year's blockbuster product while also ensuring that, in the process, their ambitions don't harm the public and bankrupt the company.

—Messrs. Fisman and Sullivan are the authors of "The Org: The Underlying Logic of the Office."

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